Its time for risk consultants to be players with the team on the line. Learn how to achieve innovative advantage using the case studies.
Thursday, February 25, 2010
Final Front
This is my final case study blog. For quite some time, I am not writing regularly. I have been writing on various topics in past three years, but today, I am writing about my newly developed wisdom that I have developed during this three years.
When knowledge is applied, fruits are not immediate. May be you have to apply it with a little tweak till you get the desired results for you and till the time it becomes your wisdom. Wisdom is some times a buzzwords or a phrase or a sentence.
With change in technology, the way I share my case studies will change too in the coming time. So my final case study for the time being for all my blog readers.
The Royal way to execute project or implement solutions is as follows.
1. Identification of Risks, Problems & Solutions 2. Agreement & Consensus 3. Clarity of Action or Plan 4. Commitment for Action or Plan 5. Accountability & Honesty to get Accounted for 6. Introspection & Acknowledgement 7. Recommitment or Revision of Commitment
Now, the wisdom - Shortcut to Execution & Implementation.
4. Get the one who will die for it or be the one 3. Get more who will die for the one 2. Reduce the numbers of people who want to die against the one 1. Let him declare the time to inform the implementation
If you have any doubts after reading this, mind well, its time for you to write down your own case study of your own successful execution and implementation.
Final Front of any successful project is successful execution and implementation.
Your questions will be answered when we meet face to face. Let me see your questions.
There are very few experts who know how to read a balance sheet and tell you where you are going wrong with your strategy. I am training myself in this art for last 16 years. I have been into Internal Audits and reading balance sheets all through out.
I don't read balance sheets to manage an investment portfolio but to know how a company stands to perform in future and where a little tweaking can help it turnaround and produce breakthrough results for its shareholders.
It's a real fun to read a balance sheet if you connect it with the key decisions taken by the management. You can know how management is performing to create wealth for its shareholders.
Interesting aspect about reading a balance sheet and P&L is when you can spot the concern areas quickly that management doesn't know that it doesn't know.
Once you know that there is something fishy, its time to find answers and reasons. Informed enquiries with management along with knowledge of business and processes, helps you to get to the skin of the issues.
Second task is about communicating what you have read to the management and inspire them to do something about it. That 'something' which you suggest will bring forth new possibilities and higher value addition for the management.
My intense knowledge in Management Audits along with my ability to read financials helps me coach the management for creating higher value.
You talk about better corporate governance, controls, planning, resource utilization, revenue generation, revenue leakage, cost reduction, where you will look first? All involves a closer look into financials. Different people look at financials in a different way.
Auditors look at a balance sheet in a different way. When you do due diligence for M&A, you read balance sheet in a different way. When you read balance sheet from point of view of wealth generation, it's a different ball game. It's strategic and it's innovative.
SMEs can add great value if they get their balance sheet read by an expert. It's important they understand the game of wealth generation. The expert spends few hours with you, visit your facilities, factories, offices and of course your balance sheet and P&L and come out with value adding recommendations that can produce breakthrough results involving turnaround of your business, increased cash generation, increased revenue, reduced cost, reduced losses and introduction to new possibilities of growing.
Reading balance sheet in this economic recession is very important. Read yourself or ask for some help.
If business consultant tells you what you already know then kick him out and invite the one who tells you something that you don't already know.
One of our clients increased their revenue by 200 %. Cost reduction achieved 50%. Asset turnover doubled in just six months.
Why Board of Directors and Audit Committee Members should know about Lean and Six Sigma? These are not the buzzwords often used by this community. Although these words are little technical and used mainly by CEOs and middle managers, the new age professionals involved in overview function should understand these concepts clearly as they are very much relevant as far as Corporate Governance, Business Integrity is concerned.
Let's take an example of a company that incurred huge loss in the last year. The company's main product line had become obsolete, and its newer ones were under performing. There were many sigma defects and wastage it wanted to eliminate to become Lean and profitable. Stiff competition, ever-increasing customer expectations and shifting market conditions made the change an absolute imperative.
Unfortunately, despite the good faith, diligent effort, and professional judgment that went into the cost-cutting efforts, the results did not turn out to be as expected. In absence of appropriate professional guidance, the company decided to tackle cost by reducing inventory and capacity and implementing JIT technique. It focused its initial efforts at the process level, instead of applying a top-down, risk-based approach. Program lacked a consistent, methodical approach and no appropriate benchmarking effort took place to capture the leading practices and performance differences correctly.
Managers were focused on achieving short-term results to drive continuous improvement without adopting a long-term strategy. Managers failed to reinvest cost savings for correcting flaws in the control design in the higher risk areas. Without a risk-based approach, it incorrectly and inadvertently cut too many controls or the wrong controls. As a result, in wake of some worst scenario, and due to huge pressure on performance, creative accounting practices were resorted to by the management to cover up the under performance.
Management often slashes costs and adopts shortcuts that jeopardize controls and upset their audit committee and shareholders. If they ignore costs, they miss opportunities to enhance competitiveness.
Weed out the waste and focus on what creates value. No body can deny benefits of the best practices that make the organizations Lean; however organizations run risk of under performance and failure when lean principles are incorrectly applied by the enthusiastic middle managers.
Lean does not always mean elimination of extra capacity, achievement of zero inventory level, complete absence of paper work as it can make the organization vulnerable in an unforeseen crisis. When you are stripped to the bone, you are left with nothing to absorb the shock. Performance suffers and profits are less than the optimum. When companies lack resources, the Managers adopt a limited view of the Lean principles and they are not clear about where to focus their improvement efforts. More often than not they choose the wrong targets for improvement.
It is important to understand that not all the activities, transactions, and risks are equal. Their importance largely depends on the nature of the business; the inherent risk in the transactions, processes, controls, technologies; and the effectiveness of people in the organization. Like many ambitious initiatives, the potential rewards of Lean are great, but it is also critical to consider risk and control dimensions involved.
Boards of Directors and Audit Committee Members are required to cultivate an atmosphere of trust that enables the directors to challenge one another and the management. They must address their company's strategic challenges - emerging markets, competitors, and technologies - rather than seek quick fixes and CEO ousters when the company stumbles. They need to know Lean, Six Sigma and Internal Controls equally as they compliment each other in creation of value for the stakeholders.
When your company takes up an Improvement Project like Lean or Six Sigma, it's important that risk based method is adopted in conducting the initial diagnostic review so that the project targets global performance and brings significant business results for you instead of isolated local improvements that involve conflicts and control issues.
Now, a puzzle for you. Check out the following diagram and tell me whether the threaded cylinder of Value Addition will move or not. Or, how each cog wheels should move so that the threaded cylinder will move? Finding it difficult to visualize? Please solve the puzzle of Value Addition, if you can. It's a Challenge.
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This will inspire you to leave the beaten track occasionally and drive into the woods. You will certain to find something you have never seen. You will create new insights about science of doing successful business. However, you need to invest. You need to invest your mind. You need Interest and Curiosity, the two batteries for your flashlight, without which you cannot search for knowledge. No Google can search it for you.
Professionals & Managers who have no curiosity or interest, or very little of either, are the one who are suffering from boredom. They fail to find correct solutions. The problem with them is they have seen everything with their eyes, but not with their minds. An active mind cannot fail. Mind is spurred to activity only by a healthy interest and a searching curiosity. The managers seek the path of least resistance and keep distance from anything that they cannot grasp or understand. The results are not up to mark or are substandard.
Leadership is all about results. You achieve results when you can move masses than when you can move leaders. I mean solution is not always about changing the leadership.
Let us make some difference and leap into a more interesting world which will turn your curiosity and transform you into a more curious and innovative businessman. Although there are numerous stories of successful people; nobody knows how they have got the right opportunity. Curious people have their pick of opportunities. The right opportunities find them.
How many ideas you are currently working on? What is the value of Intellectual Property showing up on your Balance Sheet? Are you enjoying experimentation? Or are you busy reading change management books? Don't just become ready for the change but have a role in bringing it. Let curiosity prevail for the new and the unknown among your customers and employees.
Are you curious about the new technology that has launched recently in the market? Are you curious about the new financial product which can enhance your financial freedom? Are you interested in any new segment of the business? Do new management methods evoke your curiosity?
Now question is - do departmental heads within your organization has similar curiosity and interest. Boredom makes people old before time; curiosity you will find, is the best substitute for mythical "fountain of youth".
Every project that you take up or for every complex aspect of your business, you need curious and interested people. Have you ever hired an outside consulting firm to add value to your business? Find out the level of curiosity for the assignment among those who will be executing it for you. Be it a big 4 or a big consulting giant, you need to know it. Don't take the risk of working with a half committed team with teammates who are least interested in your organization, your people, your technology, your business or the assignment itself.
Are you bringing the change? Check the level of curiosity among your employees, consultants and customers? Create curiosity and interest. Main drivers of Execution are Interest and Curiosity.
When you want to exercise 'innovation' option of the risk management, you need to invest in creating required interest and curiosity among all the stakeholders. You need escaping velocity when you want to fly to Moon. Yes, its rocket science.
What you have done so far in this regard? If you think curiosity can kill the cat then ponder on what Albert Einstein wants to say. "The definition of insanity is doing the same thing over and over again and expecting different results."
Contact us to know more about innovative knowledge application services that can transform your business curiosity. Or just click anywhere on this site to know our curiosity. Its contagious.
Recently, Risk Head of a fortune 500 company, a top global confectioner, asked me on how to approach monitoring of their accounting shared services function which had been outsourced a year back to a global BPO firm and had not been monitored since then. It came as surprise to me; as they had no prior plans to monitor and manage the risks involved with the new business model.
Nowadays many Companies are looking to implement shared services for driving scale to reduce cost and increase efficiency by combining their common back office functions dispersed across various business units. This could be anything from Human Resource to Quality Assurance and even Finance which could either be in-sourced or outsourced to a BPO firm.
Many difficult decisions are to be made before shared service function may start delivering desired results. Some of these decisions are irreversible in short term and thus risks have to be better understood beforehand.
It's a bad strategy to impose a centralized control function at an operational level in the belief that centralization will straight away provide a stable platform for achieving best value results.
Majority of share service champions both at the client and vendor level have come from an era of proprietary protectionism and therefore are having some difficulty in grasping the new processes that reflect today's technology convergence practices. In essence, they are making decisions based on technological limitations that no longer exist instead of the operational imperatives that are required.
Unfortunately in most of the cases, the people, who are too busy working in a standardized process environment, think that working in it is going to make them better at working on it. It's like they don't identify the destination before they start peddling the bicycle. Many choose shared services as they are too busy doing things and do not have time for improving or streamlining the processes and the functions aren't getting any better to provide them with substantial cost benefit advantage.
When Companies choose a new business model without considering non-confirming information and the associated risks; it is like they leap in their car and take off; knowing that they have a pretty good idea where their destination is, but they haven't timed it. They don't get into the business specifics that are part of the route to get to the goal or destination.
Visualizing as to how risks can be perceived differently is one of the weakest points for anybody getting involved with in a shared service situation. Bear in mind; if you operate out of need, rather than opportunity, you will always make poor decisions.
Let's understand it from two brief stories from NASA.
Scientists at NASA have developed a gun for the purpose of launching dead chickens. It is used to shoot a dead chicken at the windshield of airline jet, military jet, or the space shuttle, at that vehicle's maximum traveling velocity. The idea being, that it would simulate the frequent incidents of collisions with airborne fowl, and therefore determine if the windshields are strong enough to endure high-speed bird strikes.
British engineers, upon hearing of the gun, were eager to test it on the windshields of their new high-speed trains. However, upon firing the gun, the engineers watched in shock as the chicken shattered the windshield, smashed through the control console, snapped the engineer's backrest in two, and embedded itself into the back wall of the cabin. Horrified and puzzled, the engineers sent NASA the results of the experiment, along with the designs of the windshield, and asked the NASA scientists for any suggestions.
The NASA scientists sent back a brief response: "Thaw the chicken."
In another story, when NASA began the launch of astronauts into space, they found out that the pens wouldn't work at zero gravity (ink won't flow down to the writing surface). To solve this problem, it took them one decade and $12 million. They developed a pen that worked at zero gravity, upside down, underwater, in practically any surface including crystal and in a temperature range from below freezing to over 300 degrees C.
And what did the Russians do...?? They used a pencil.
Remember, it is the application and the purpose that drives value.
It is better to expand the context which could reveal win-win options / opportunities of changing business model and would not amount committing to unnecessary and impractical process re-engineering, standardization and benchmarking across the business units.
Thus it is critical to create a community of diverse talent committed to shared results and not so called sharing services merely to reduce cost. It is critical to ensure a shared responsibility among all players that adds uncommon opportunities.
In reality, the adaptive capacity of a new business model reflects a collaborative process in which key stakeholders work toward identifying and achieving a collective, best value outcome. In practical terms, the unique operating strengths of different stakeholders are actually leveraged to achieve both stability of processes and consistency of outcome.
~ it is the application and the purpose that drives value.
What do you think about a popular organized retail chain which changed its ERP system thrice during last seven years? Some individuals with the retail organization had opposed to the frequent change by the top management. Is this really bad a strategy considering our living in this era of exponential time where shift happens at the speed of Internet?
After technology acquisition, technology adoption along with required organizational innovations is the next logical step on the technology capability ladder. Capability convergence is the end goal while technology acquisition is the initial first step. However, technology dynamism can be visualized as the youth and vigor displayed by a firm in moving up and down the steps as shown above in the picture.
To the adopting organization, benefits resulting from adopting a new technology may include increased productivity, efficiency, improved processes, cost savings, improvement in market share or entry to new market et cetera. To an individual in the adopting organization, benefits derived from such change may be improved job performance and the associated rewards or benefits.
However, when new technology threatens earnings through corrupt practices, then its utilization is perceived as negative. It is also perceived as negative when the change requires sustained dose of consciousness, motivation and hard work to change routines and to come out of one's comfort zones. Also, when confidence is less in mastering the new technology, negative attitude of user group is derived. Thus it's important to know the root causes of resistance to change.
There is difference between decision of the firm to adopt a new technology and decision of its employees to adopt it. The firms' decision to adopt an innovation or a new technology may be motivated by 'rationalism', 'bandwagon pressure' or 'forced choice'. Rationalism assumes that firms choose and adopt new technologies freely based on fit with its strategy; under bandwagon pressure firms adopt innovations to imitate its direct competitors. The choice to adopt a particular technology may also be due to various forces like internal and external customers, government, vendors or consultants.
Technology Adoption is thus the receiving organisation's collective decision to accept the new technology and implement it sincerely by making necessary changes within the organisation and across the organizations. Management decision to adopt a new innovation or technology has to be supplemented by employees' positive attitude towards the new innovation.
It is very critical for organization to adjust itself to a new technology; the new technology must have a certain fit with the firm's organisational structure, processes, values and beliefs. Innovation imposed on organization without internal receptivity is bound to fail. Internal resistance results from incompatibility between the nature of innovation and the existing configuration of interests and resources.
Thus two issues of critical importance in technology adoption are opposition to the new technology from employees and difficulties in understanding and adopting the best practices.
The darkest blue is the zone of the tacit best practices.
Best practices cannot be replicated by imitating underlying routines. Tacit nature of many routines makes it difficult to identify and understand how they support a particular competence. Organizational routines can be visualized as tacit activities. Organisational learning and knowledge management processes aim to capture these activities and codify them as standard operating practices.
From out of these best practices; activities and tasks are to be derived, for implementing. Identifying activities and tasks from best practices is not easy as there is a large gap between what a task looks like in a process manual and what it exactly is in reality. Actual work practices are full of tacit improvisations that the employees who carry them out would have trouble articulating.
For successful adoption of best practices and to get high returns from investments in expensive IT tools like ERP, the organisations need to focus first on transformation of attitude and mind sets of users and only thereafter codification of the knowledge or best practices using Information Technology be targeted.
The challenges in adopting best practices are that these are not static but represent a moving target and objectives and firms need to continually strive towards deeper levels of adoption and integration. Also, there is synergic and systemic links between several of these best practices and they are effective when implemented together. Many believe that best practices aren't suitable competitive advantage because they are so easy to copy. It is true that, once best practice is out there, every body can imitate it, but companies that win do two things i.e. they imitate and improve.
Indian culture is full of such best practices. These cannot be fully understood without knowledge of the folk idiom. Every Indian practice is indebted to oral traditions and folk stories. The aesthetics, ethos, and worldview of a person are shaped in childhood and throughout early life, and reinforced later, by these verbal and non-verbal environments. In largely everyone whether poor or rich, high caste or low, professor, pundit, or ignoramus, engineer or street hawker everyone has inside him a large well of best practices.
This large well of knowledge is found in everyday practices and practical coping. Folk tales, local narratives, and idioms serve as the building block of Indian business culture. For example, stories of Akbar and Birbal, Tenali Rama, and Mulla Nasseruddin all point to a contextual understanding. They indicate a notion of corporate governance as common mores, and entrepreneurship as opportunistic 'making do'.
Best Practices from Akbar & Birbal:
Once King Akbar had some quarrel with Birbal so he went on an exile to stay in a nearby village hiding his identity.
Akbar later realized his mistake so he found out a way to search Birbal. He announced that all land owners of nearby villages should come to him with their wells so that the best practices in maintaining a well can be identified and imbibed for maintaining the government wells. Anybody failing to do so will have to pay a fine of Rs.10000/-.
This order was also heard in the village where Birbal lived. The land owners of that village thinking that it is impossible to move a water well physically to any other place, started abusing the king for levying such a huge inescapable penalty in name of sharing best practices.
When Birbal heard of this, he knew it was Akbar's trick to find Birbal and Akbar actually meant knowledge well of best practices i.e land owners' own mind so that goverment well i.e government officials' mind can imbibe best practices from them.
So Birbal explained something to the land owners and next day the land owners along with Birbal arrived in Delhi. They did not enter the city and stayed outside the city. One of the land owners came to king and said that according to king's orders they have come with their wells, now King needs to send his wells to welcome them.
When Akbar heard this, he understood that it was Birbal's trick. He asked the land owner, who told him to tell this way? The land owner replied, a stranger who came to stay in our village some time ago asked him to tell this to you. When asked about his physical appearance, it matched that of Birbal's. Then Akbar sent his people to welcome Birbal to be brought into the city with a great pomp and show.
There are more stories like this how Akbar found Birbal back. Some people are so passionate about their work and they reveal their talent so often. So please go ahead and try out Akbar's best practices for searching, attracting and retaining the right talent.
There is a definite link between Retail & Infrastructure sector but there is one more link, i.e. their customer strategy. Associating cement to supermarkets is about how a company can learn from the companies from other industries. In this era of high competition chance favors a prepared mind. Competition favors a prepared company. Therefore, those companies that can improve their relative position during hard times gain a clear edge. This is the time to stress differentiation over productivity. The focus is required on value-added differentiation and not just price competition as it is a business assumption than a strategy.
Mr. Sampat, Commercial Head with a cement company was performing data analysis on the customer data of his company using his newly learnt data analysis skills. He soon realized that customers kept on changing their orders most of the times. The price of cement is largely determined by the transportation costs involved in delivering the cement. Due to such frequent changes in the orders by the customers, the delivery time and transportation costs were higher.
On further analyzing customer behavior, he thought that if he could know the exact location of the trucks carrying the cement bags by any means he could resort to a redeployment strategy that can reduce the over all transportation cost and delivery time. He called up his friend who was working with a courier and freight company to know how his company tracked merchandising and how it predicted demands for picking deliveries from various locations.
He thought for a Global Positioning System and then contacted a telecom company to put Global Positioning System (GPS) in their trucks. He then devised a central tracking and redeployment system. And, with this new system even if the order changed, the company could deliver more quickly than its competitor. It reduced its delivery cycle from 120 hours to 15 Hours, reduced its truck fleet by 4% and improved reliability from 24% to 78%.
The company thus learnt to correctly identify its crucial IT and business priorities. The analysis was typical of most businesses in that it learnt that, left to their own resources, projects would multiply and profits would decline. Instead the company analyzed its 30+ current IT projects in terms of value to the customer, resource utilization and possible productivity improvements. The company stopped 25 projects, slowed down 8, maintained 5, accelerated 3 and added 2.
Similarly, the winners in the supermarket industry will be those that will use new digital tools to create a customer-responsive way of doing business. Retailers, distributors and manufacturers will have to share data efficiently and effectively in a manner so that they communicate fully. Transactional data is just a subset of what you really want to know.
Grow faster than revenue. Don't hire management consultants for the entire year as their charge is three to four times of the human cost. Hiring them make sense only when the consulting assignments are shorter in duration and highly focused requiring consulting skills. The message is - the process of reducing overhead costs on a sustainable basis is more subtle than the most companies think. The short-term margin improvement tactics to fill gap in one-off quarterly earnings may not bring about change as these ambitious cost reduction programs often lose momentum after some time.
Cost-cutting measures that hinder a company's growth objectives will probably be reversed, while those that sharpen its strategic focus and clearly add value are likely to be retained. Companies that truly transform their approach to overhead cost reduction align their cost reduction efforts with their strategic objectives with a strong commitment. Their hiring of consultants is driven accordingly and hence a higher ROI is achieved in all the consulting projects as they meet the strategic objectives.
A pharmaceutical company wanted to reduce its overhead costs by 30 percent and it made its Line Managers accountable for achieving the same. Although the targets were met, the company lost much more in the process. Managers failed to understand the rationale of reducing costs. There was too little analysis of what made costs balloon in the first place. Also, Managers were not given tools and training to help them target and eliminate waste. The net result was fewer people doing more work in the same old way, leading to a vicious circle of declining morale, quality, and productivity. Two years later, costs were on their way back up. Now it is difficult for the company to commit to any cost cut drive in the future.
An entertainment company into exhibition business found that it turns huge amount of data into managerial reports that had little impact on the direction and development of the business. Most companies can find similar waste especially in areas like finance, human resources, and IT.
Companies in the same industry can have sharply different overhead profiles if their strategies are different and thus one should not simply cut cost copying its competitor without a detailed analysis. Take example of two competing food retail chains. One likes to be first in any market and thus pays a premium to its real-estate professionals. The other's strategy is to reduce its market-entry risk by locating stores only where other retailers have already proved successful. It regards its real-estate staff as an important, but mainly a transactional group.
In some cases, capability reviews and organizational restructuring can highlight opportunities to reduce overhead costs. One chemical company reduced the number of staff in its marketing function to 40, from 140. Because the company also sharpened its focus on exactly what it required to drive revenue, however, its overall performance rose rather than fell. This company was aware that without making its employee visualise the underlying goals that are linked to overall corporate strategy, its cost program can deteriorate into a "race for the numbers" and, in the process, lose the support of the workforce.
A leading hospitality company boosted its performance by redesigning its strategic-planning process and business unit plans were reduced to 6 pages, from 70, and the strategic-planning cycle was reduced to six weeks, from four months. Shorter documents generated more dialogue, and a shorter planning cycle produced a strategy more responsive to the market. Planning teams could focus solely on the core elements essential to performance.
A technology company started to close their books quarterly rather than monthly, and a broad range of financial summaries was reshaped, greatly reducing the resources they used. Eliminating reports that were no longer critical to business activities or were duplicated unnecessarily for different parts of the organization offered similar opportunities.
An automotive company found that it had many more staff members employed in support functions than its rivals did. It turned out that a large number were spending a good deal of time fielding questions from the CEO and that each function was building capabilities to meet his expectations. Once the CEO understood the ramifications of his inquisitiveness, he evaluated his requests more carefully, which made it possible to redeploy a number of skilled people. Furthermore, the CEO's willingness to change his own ways sent a strong signal to employees.
The CFO and CEO of one large media company agreed on the magnitude of the change needed but not on how to accomplish it. Their differences ultimately eroded commitment to the program and its sustainability.
Conclusion: To reduce cost on a sustainable basis requires shifting not just how Managers behave but also how they think. It is not about rocket science but streamlining principle of aerodynamics.
Once upon a time, in India, there was a big hermitage of a sage in the valley of Himalayas. There were lots of cows, by milk of which alone the expenses of the hermitage were met. The milk was also consumed by the resident of the hermitage. One day a disciple came to the sage, the headman and his Guru to make a complaint. He expressed his doubt that somebody is mixing water in the milk of the hermitage regularly. How to curb the ill practice? asked the Guru. The disciple suggested that one person be employed who will monitor the milk to control the adulteration. Thus, one person was employed for the purpose.
After few days, the disciple came again to his Guru and said that since they have employed a person to keep a watch over the milk, there has been more mixing up of water than before. The Guru casually said to keep one more person to watch over the first. A few days later, there was a big blunder and many disciples came to the Guru to complain heavy adulteration in the milk. Moreover, along with water someone had also found a fish in the milk.
The Guru said that if you employ more and more people to monitor, the adulteration is bound to increase. Initially there were lesser number of people who had their share in the milk and therefore there was lesser water in the milk. When you had increased a person for monitoring, his share was also added which in turn increased the stress on the existing resources. When you employed the second person, the adulteration increased to such an extent that you have now a fish in the milk instead of cream.
The disciples humbly asked the Guru for a correct solution. The Guru said it was his mistake that he never made his disciples mindful enough to educate and rightfully guide their subordinate disciples. By making a few people mindful does not make the society free of ills but all should understand their duties. We have to change ourselves first to bring the changes in the society. Mahatma Gandhi once said that we should become the change we want to see.
The Guru said we should have capabilities to change the mind set of the people in the hermitage. We preferred the easy way of making a complaint instead of selecting hard way of making our subordinates mindful of ills of adulteration and benefits of caring cows to produce more milk.
The Management Accounting says no one should be made liable for inefficiencies of others. The Internal Auditor is made liable for inefficiencies of the Control Owners. Cost of Internal Audit is connected to extent of its testing and monitoring. When controls designed and exercised by the management are ineffective and IA places lesser reliance on it and increases the extent of testing and monitoring which inturn increases the cost. When IA over rely on effectiveness of controls it faces risk of not exercising due care and diligence for preventing control failures.
Self Control Assessment (SCA) technique in its current format too is not effective as Control Owners are made ready to the skills of monitoring instead the objective and the ethics. There are newer ways of reducing cost of monitoring but need is to go beyond the prevailing dominant designs in the industry. We must first find out how to balance our monitoring programme which does not involve duplication of efforts allocating the valuable resources incorrectly and thus increasing our cost of monitoring. Secondly, we should become more and more objective oriented to find out newer ways of creating deterrence at a lesser cost. What you think about Ethics Gospel like this?
Your application of Indian philosophy is better only when you draw correct analogy. Remember it's a rocket science and you need the escaping velocity to mitigate the effect of dominant forces of existing systems and mind sets. The problem is difficulty in drawing a correct analogy because adulteration is on and purity is gone. Now, draw an analogy to be able to better understand the presented case study and change your execution style hereon.
I could hear words like VBM (Value Based Management), EVA (Economic Value Added), Cost Reduction, Value Creation very loudly from the direction where I saw two business managers in stylish suits having a hot discussion. I heard the one in blue suit saying; all our future decisions about capital allocation have to be based on the value creation criteria. Thus, we should know how to add value to our businesses and how to shift our strategic focus to realize higher value.
The other one in the brown suit said we have already adopted various best practices like Total Productivity Management (TPM), Total Quality Management (TQM), Business Process Restructuring (BPR), Six Sigma, and several other global best practices. We have robust governance practices and disclosure standards. We know our customers' needs better. We are actively doing international M&A and investing in future technologies. We have adopted a hybrid approach which seems in coherence with today's dynamic environment.
The one in blue suit remained silent for a while and then said every person, every organization and even government nowadays is a product of a coalition and the forces that are always at war. The war is between the Trivial Many and the Vital Few. The Trivial Many comprise the prevalent inertia and ineffectiveness. The Vital Few are breakthrough procession of innovation and effectiveness. However, the war is difficult to observe as it is the same person, the same unit and the same organization which produces both the forces. All we can see is the over all result i.e. the net effect of both the forces at work.
At the most, we only remove businesses that are most unpleasantly unprofitable whereas we put only minor efforts to increase the extremely profitable business. This is a dreadful compromise, based on our misunderstanding. We all say small is beautiful but complexity too is our sponsored thing. Believe me or not as we sponsor complexity, it also sponsors us. And, therefore we are skewed towards larger and complex organization instead of most profitable ones.
Each value seeking organization can become very much more valuable, but the crux of value creation is a process of innovation and substitution. The entrepreneurs shift the economic resources from low productivity areas to higher productivity areas. This same act is called Arbitrage by the modern financiers.
International Financial Markets are very quick to correct anomalies in valuation. For e.g. Exchange Rates. But the business organizations and individuals are generally found to be very poor at this sort of entrepreneurship or arbitrage, at shifting resources from low productivity usage to higher productivity usage, or at cutting the low value resources and buying the high value resources.
At first there is confusion as to what is more valuable and then there is resistance to change. It is easier to learn out of box thinking using popular nine dot puzzle but when it comes to reality and putting out of box thinking in practice, it is damn difficult.
Other said I don't believe you as today's business managers are smarter and they know how to solve nine dot puzzle using four lines, three lines and even one line.
I went ahead with my pad and pencil and asked the guy in brown coat to solve the new trick mentioned in The Game of Arbitrage -I , which he could not solve for next 2 hours.
I knew he was the same guy who resisted giving me 2 hours of his for sharing a revolutionary idea which could have reduced cost of monitoring risks and controls significantly for his multi unit organization.
Morale of the Story: Learn the Game of Arbitrage not just know the best practices.
Internal Audit partner and his client, the CEO had arranged pow-wow among their teams to encourage an open discussion on the bitter auditor-auditee relationship. At the pow-wow, the marketing manager made a remark that although one should never minimize findings or neglect ones obligation to report accurately, too many internal auditors needlessly drive a wedge between themselves and their auditees by presenting findings in a way that belittles the auditee instead of treating findings, analysis, presentation as an opportunity to address problems and to facilitate improvements. The purchase manager added that internal auditors always act as policemen and come with backing of authority.
To this, one audit manager answered that the business managers will have to begin to look internal audit as an objective consulting group and not just an independent assurance group. Answering to the concerns of the marketing manager, he said that part of the problem is that internal audit also has a stereotype like business managers and an education process is needed for both, the auditor and the auditee. He also said that our source of authority is our ability and independence whereas business managers think that we are in the organization to appraise them for their performance and thus our reports with suggestions are treated as report with coercion by them.
The CEO said that Internal Auditor should keep management informed of the progress of their work along the way. Letting management know what they are finding allows them to take action and fix problems while the audit is still in progress. We need 'No Surprises'. Also, internal auditors don't leave considerable time open in the audit schedule so that we can make special requests.
The IA partner replied that our terms of reference and scope should be clearly interpreted as the management inevitably try to prevent audit encroachment onto the 'management patch' and thus try to restrict us to the policeman's role, whereas we view our role as that of the independent reviewer covering all areas and levels of operations, decision making and governance. We agree that Internal Auditors should employ a just-in-time approach in setting up their audit plans for adjusting special requests of its clients, but at the same time, they expect from auditees to co-operate and respect their time.
The CFO said that both auditor and auditee have their own perception regarding one another's needs. Also, they have an expectation as to the nature of their relationship. I have closely seen both the sides in my life. This bitter relationship soon motivates young internal auditors to seek career elsewhere. This is also one of the reasons; the audit industry is seeing a huge turnover of young professionals. Internal auditing's success in the next millennium will depend on providing its audit clients with unique and exceptional services. We need to listen to each other innovatively. Such pow-wow is definitely a step in this direction. The pow-wow continues...
Like every year, this year too, the ERM meeting by Chief Risk Officer was not very interactive. The external consultants who were present at this year's meeting with their vibrant presentation even could not engage the senior managers present to contribute to 'to be' Enterprise wide Risk Management System (ERMS). The senior managers at the meeting didn't ask searching questions and they didn't debate but were just sitting passively watching the nicely made power point presentation. The meeting soon got over before the lunch hour and the managers left with no commitments whatsoever.
Two weeks later, when annual budget and operating plan for the next year was on the table of CEO; inherent conflicts of interests were visible. All the line managers had strongly presented their cases for granting excess budgets for their activities. They had confirming information for their decisions which they had already committed of making. All had justified their future action plans without any sort of critical evaluation in light of any disconfirming information.
The Production Head wanted to have full capacity utilization with stable production schedules for bringing major cost saving for the assembly unit whereas Sales Head was pressing for having wide range of products with different sizes so as to increase chances of making a sale. Unlike others, CFO had envisaged lower economic growth ahead and was worried about inventory built-up and additional cash outflow on account of discounts and promotional activities. Many managers have tendency to be over optimistic or unnecessarily pessimistic when their incentives are linked to their specific functional achievements and thus they tend to discount the information that might lead to conclude that their plans were biased and not in synchronization with other functions.
Something was definitely missing. A moaning Risk Management System which critically validates assumptions. If you want to reduce risk in your business, you have to seek both confirming and non-confirming information before you take action. This helps the firm to make intelligent trade-offs based on reality. But most of the time the problem is lack of platform that encourages open debating of the assumptions made by the managers and their by challenging of each assumption by cross functional leaders at granular level with penetrating questions.
Is Chief Risk Officer responsible for seeking disconfirming information or decision makers themselves are to seek such information compulsorily while making any decisions as a process? Who will conduct a meeting for challenging their own assumptions openly? Who will make correct trade-offs? Who will see the entire Elephant of Enterprise wide Risks? Audit Committee!!! I don't think so. Debating in group will only construct and share a comprehensive picture of enterprise wide risks. Only open and guided discussions will encourage commitment to execute with accountability and develop respect for each other.
Yes. Respect and unity within a business team are the missing elements. No one can claim, not even any sort of Committee, of having a vision of the entire Elephant of Enterprise wide Risks. Yes. ERMS too needs integration with the entire body/soul of knowledge system, the biggest of elephant ever known to business kinds.
The curious Rahil approached CEO afterwards and asked him about the blue binder. CEO smiled and told him that during his school days, one of his teacher helped him develop some basic skills. All students had been focusing on homework completion, notebook organization, and planning for long-term assignments. Students who sometimes struggle in school may have difficulties in these areas. For example, a student may be forgetting to write down assignments in class or a student may complete homework but not put it in his or her school bag before going to school.
Binder organization and planning had helped him a lot. One thing that worked for him was color coding of the binders. He told he learned essentially then was taking larger projects and long-term assignments and breaking them down into more easily doable chunks. This also helped in estimating time for completion, sticking to completion schedules, adjusting completion schedules and benchmarking. When report card came out that year, his teacher asked him to reflect on what he did well and what areas needed to target for improvement. CEO told Rahil that being specific, building on successes and backing it up with the structure supported him to keep moving in the right direction towards greater academic success.
Then with a serious voice he told Rahil that do you know How Standardization Affects Competition and Innovation. He told that there is a success story behind the use of blue binder in his organization. The success of his blue binder is similar to other stories of standardization: the evolution of the personal computer industry, local area networking and the Internet revolution.
Then he told Rahil, the story of IBM Personal Computers. Microcomputers existed prior to the release of the IBM PC. So what was it about the initial IBM PC that made it become a de facto standard that served as the basis for the WINTEL (Microsoft Windows running on an Intel or Intel compatible microprocessor) standard still in use today?
There was nothing spectacular about the IBM PC. It was priced higher than other products from Apple and the various manufactures of Z-80 based CP/M computers. Although sporting a "16 bit" microprocessor, the first versions were slower in processing than the 8-bit Z-80 computers. The operating system provided with the IBM PC was a hastily assembled and feature-lacking operating system known as DOS developed by Microsoft.
One clear reason for the success of the IBM PC was that IBM developed it. IBM was the largest computer company in the world at that time. IBM's introduction overnight legitimized a market trend.
The other reason usually discussed was the fact that IBM chose to fully publish the specifications to the hardware and the firmware of the PC. The blue colored binder that contained the IBM Technical Specification became the blue print for a multitude of small startup companies and traditional competitors of IBM. IBM created the first open source product, the IBM PC. Further fueling this openness was the wily negotiating done by Bill Gates and Microsoft. Microsoft convinced IBM to permit them to sell a version of the PC-DOS operating system to other manufacturers, thus creating an overnight de facto standard operating system.
The last reason was market timing. IBM saw the threat caused by the microprocessor and enabling applications, such as word processing and spreadsheets and reacted by embracing the marketplace instead of trying to fight it.
CEO told Rahil that he cannot tell other specific issues and incident about his own organization but he told Rahil to draw an analogy from the story to understand why he was so particular about the blue binder.
Rahil, an entrepreneurial risk consultant recounts a perplexing assignment where he was the third risk consultant brought in to conduct an organisational review and process improvement assignment. As he wanted to know the cause of dissatisfaction for the client on previous occasions, he approached the preceding two consulting firms where he knew a few consultants.
After discussing the client issues with them, he first decided to decline the assignment but then he thought, he also need to know the reasons from the leadership of the company who wanted his services. He asked CEO of the Company as to what are his expectations and how he wanted him to deliver it. The CEO explained that he wanted a detailed report in a blue binder with eight tabs.
He thought, by letting the client to select the type and color of the binder and the template of deliverable, is neither going to challenge his professional approach nor his standards of delivery. So, he accepted the assignment and conducted his own analysis and produced a report in a blue binder. The CEO not only praised the report, but also implemented the recommendations. When customers are not ignored, underestimated and denied, they respond.
What was so special about the blue binder? What was the secret? The curious Rahil approached CEO afterwards and asked him about the blue binder.
I was discussing innovation with CEO of a fortune 500 company recently in an informal meeting. As we were discussing, he mentioned that they have hired a named consulting company recently for implementing enterprise wide risk management system in their organization using latest control frameworks. He mentioned that there is no Rocket Science involved and consultants are just creating some kind of laundry list of risks, controls, activities and tasks and then plotting them in various fashions. It was apparent that he was not happy with the consulting project going on in his company but was not sure what was lacking.
I mentioned to him that as per recent survey by IBM on innovation , many of CEOs' top obstacles are within their own control. It is apparent that the majority of issues reside somewhere inside their own organizations. Culture, budget, people, process and technology were cited as some of the most significant hurdles. For CEOs, this is a classic case of good news as well as bad news. Because the issues are internal, CEOs have more control over them. However, these hurdles compound the challenges CEOs face.
Leading organizations to be more innovative is becoming more and more difficult. As massive change bears down on CEOs' organizations, their employees, stockholders and Boards are growing increasingly impatient for results. And when those results are not forthcoming, consequences can be severe. And, these are reflected in high turnover of CEOs in past few years.
He told that he might leave the job by the year end and may start his own entrepreneurial business. We debated on the issue for some time and then we started talking about business and technology integration which we both thought is of great importance. He told me there are lots of gaps in integration which are frustrating and he wanted to improve, but didn't know how to do it and found the task too complicated.
For adding humor to this serious discussion, I said you now need to employ something which involves Rocket Science. What is Rocket Science? With a spark in his eyes he said let us create a background to explain the term within the business context. When your mission is to reach other part of the continent in few hours, you faced with a force called turbulence approaching the speed of sound. Solution is to understand the science of aerodynamics and streamlining. Using the same principle, the business world has streamlined its business processes. When your mission is moon or mars, you are faced with powerful centrifugal force called gravity of the Earth. You need to escape this force and to achieve an escaping velocity you need to know the Rocket Science.
Innovation is not just about challenging the existing but beyond. What if you mission is to reach other galaxies within different time space and dimensions and you need to approach the speed of light or tachyon. This is even beyond the Rocket Science.
Globalization and technology advances are lifting competition to new heights, while creating unprecedented opportunities to differentiate. Financial markets are demanding ever-faster growth. Growth and perhaps even survival depends on innovation. Similar to implementing a corporate strategy, becoming more innovative means making deliberate choices filtering the plethora of options you have as a CEO and concentrating on those few actions that can truly make a difference.
That day in evening, I was again reading the final paragraphs of the survey by IBM on innovation :
Has your innovation agenda expanded beyond products/services/markets innovation and operational improvement to encompass your business model, the emerging basis for competition? How much of your innovation is bold versus routine? How would your business model be different if you started with a clean sheet of paper? What would you do if you were getting into your current business as a start-up? What capabilities do you have that might fundamentally change the value chain in another industry? Do you continuously explore new technologies that could change your business? Is technological change an input to your strategy development process?
I wanted to add one more question: Can you think of something which involves Rocket Science and beyond?
A pharmaceutical company was engaged in a process improvement program but unfortunately the processes have not been identified following the principles of execution based organizational structure and value chain analysis, moreover they have been identified without a performance context. This means they were not connected to the business systems or business results.
The pharmaceutical company mapped processes based on its functional view of the organization and the process improvement efforts (mostly Six Sigma) were conducted within its few functions over the past two years. These projects had been initiated because there was a willing functional VP sponsor who was a Six Sigma believer. And, the outputs of the processes in question were relatively easy to measure. Also, there had been customer complaints emanating from some of these processes. Some of the improvement projects were defined by the Company personnel seeking certification.
At the same time when these process improvement projects were initiated, a strategy review by the executive management team concluded that the very survival of the company rested on new product development and a redirected and reenergized sales organization.
Looking from the horizontal or value chain view of the Company on top of the functional view of the Company, one could see that the process improvement efforts executed over the past two years were buried in the 'Delivered' segment of the value chain, while, at the same time, there were lost strategic opportunities for process improvement in areas of new product launching and new sales organization.
Identifying processes within a major functional silo can give the illusion of being linked to business results, but the potential for sub-optimization still looms large. Given this fundamental flaw of processes not being linked to business results via the value chain and organization structure as primary processing system, the following are some of the predictable problems with subsequent process improvement efforts:
First, the criterion for selecting processes for improvement is based on staff's particular interest which might be conflicting with specific business priorities. This will cause three unfortunate results: The first result will be that every improvement effort will have the potential to sub-optimize the business. The second result will be missed opportunity. The third result is the waste of time and money resulting from the projects that were being initiated primarily because there was a willing sponsor or just to demonstrate the power of new management concept by experimenting on a safe, but insignificant operation or someone can get his or her Black Belt accreditation due to such projects. The accumulation of a few projects initiated for reasons such as those mentioned above will soon begin to undermine the process improvement efforts.
In the absence of a connection to business results, the process improvement effort gravitates toward irrelevant process improvement goals. The improvement projects tend to get identified, defined, and shaped so as to best apply and demonstrate a particular methodology. It becomes a methodology in search of a project rather than a Critical Business Issue in search of a solution.
Vice president in the pharmaceutical company believed that the procedural level workflow documentation required by various certification efforts, such as ISO and SOX, is what process is all about. Whereas some in the organization thought that process documentations is similar to IT requirements documentation. Although software made it easier to manage documentation required for SOX and other certification, but this led to the delegation of process documentation to techies and clerks. TQM focused on processes as a tool, taking application of the process notion to the sub-process level within the functions and many staff resources were made process owners in silos increasing organizational conflicts and sub-optimisation. The Six Sigma movement proved to be a rigorous, precise, but costly analysis just to address some unimportant problems buried deep in the organization.
In contrast to the issues identified above, if the processes in a process improvement project to be linked to business requirements, process improvement should work as follows:
A process improvement team identifies an emerging or potential process performance problem. This problem is shared upward with the appropriate level of executive management team or perhaps directly with the value chain management team. The executive management team at the appropriate level assesses the significance of the problem identified by the process improvement team, does a preliminary analysis to determine likely causes and the scope of the problem, and, if merited, initiates an improvement project with a higher ROI. The executive management team uses the cross-functional value chain map to track the location and progress of all such performance improvement initiatives, ever vigilant for possible sub-optimization.
The internal audit has poorly performed as far as communications of findings are concerned. It is not just about creating a fancy presentation or writing executive summaries with punch lines to the reporting authorities. The innovative communication should change the image of internal auditor and internal audit should be looked as an objective consulting group instead of an independent assurance group.
Ponder hard at currently used methods of presenting audit findings and determine whether or not the process unnecessarily focuses on higher management instead of issues at the auditee level. Although one should never minimize findings or neglect ones obligation to report accurately, too many audit shops needlessly drive a wedge between themselves and auditees by presenting findings in a way that belittles the auditee instead of emphasizing the identification of problems, treatment of findings, analysis and presentation as an opportunity to facilitate improvement. In essence, the action plan should anticipate management's response to findings and help turn findings presentation into a constructive process rather than a barrage of criticism.
Internal Auditor should focus on two words: NO SURPRISES. This reduces pressure on the internal audit team. There should be some kind of interim presentation to the auditees about the factual findings to trigger discussions and understanding various options for correction or improvement. It is important to keep auditees informed of the progress of internal audit findings and work along the way. Letting auditee know what we are finding allows them to take action and fix problems while the audit is still in progress.
By resisting the temptation to hoard audit findings until big end-of-audit presentation, the internal audit can make auditees more enthusiastic about the results and the job becomes easier. Innovative communication reduces monitoring and internal audit cost to a great extent.
Case Studies is an effective and innovative way to communicate to the top management and audit committees about the results of internal audit or consulting project in place of executive summary. Consequently, it is recommended that a few issues or risk management projects be developed in a case study format. A typical case study describes the situation, provides appropriate background information including events that led to the intervention, presents the technique and strategies used to develop the study, and highlights the key issues in the intervention. Case Studies tell an interesting story of how the evaluation or test was developed and the problems and concerns identified along the way.
Case studies can be used in group discussions, where interested individuals can react to the material, offer different perspective, draw conclusions about the approaches and techniques. Also, it can serve as self teaching guides for individual who are trying to understand how risk evaluations were developed and utilise in the organization. Finally, case studies provide appropriate recognition to those involved in the actual cases. More importantly, they recognize the participants who achieved the results as well as managers who allowed the participants to be involved in the project. The case study format is one the most effective tool for learning about the internal controls and risk management.
Selective case studies may then be printed as success stories in the broachers or newsletters of the organization to spread and share the knowledge.
Best practices are like benchmarks. They are very personal and contextual. Applied incorrectly, best practices can become handcuffs. People say let's apply best practices to help improve the processes. We always look at what has worked for others and try to repurpose it for our requirements. Does that make it "best practices," though?
Best practice like Just In Time (JIT) inventory system is not just an attempt to maintain minimum or zero inventory. The JIT process involves fine tuning production and supplier scheduling systems, where inventories are supplied when needed in production and monitoring the entire value chain closely to reduce wastage and minimize inventory buffers.
An US company had known about JIT used by its Japanese counterparts with assembling cost below 20 % of its own. In an attempt to replicate the success, US Company too then implemented JIT. Although it was successful in reducing its assembly cost noticeably, it experienced dramatic problems with its major suppliers at the same time. They begun to demand price increase that more than offset the assembly plant cost saving. The company blamed its suppliers for not using JIT concept for their own operations. However, the problem was different and not realized by the US Company initially.
While the US Company reduced its need for buffer stocks, it placed major strains on the manufacturing responsiveness of its suppliers. The reason was very simple. The assembly plant of the US Company was experiencing huge and uncertain variability in their production schedules which made the manufacturing for its suppliers a nightmare. Management had ignored the idea that JIT involves partnering with suppliers down the value chain. It did not realize that the key in the success of JIT for Japanese assembly plants was schedule stability for its supplier firms.
A knowledgeable risk consultant can play important role in implementing and maintaining innovative management accounting systems like JIT, ABC & Six Sigma. The risk involved is of making incorrect planning decisions and control decisions.
Nowadays activity-based costing (ABC) is being adopted as an alternative cost accounting system that supposedly overcomes the deficiencies of the traditional cost accounting system. However, ABC has been abused by its users. It is now clear that one should understand it from Activity Based Management and strategic perspective and should not use it as an accounting system by bringing it in the general ledger system.
Proper Risk Consulting may contribute to the success of new management accounting concepts through several types of involvement: (1) audit of cost drivers, (2) audit of non-financial performance metrics, (3) Value Chain Analysis, and (4) audit of value added by ABC.
This is the future area where maximum value addition can be achieved and requires different approach in risk consulting.
Risk exists if you are not aware and not implementing a new management tool and technique when your competition is. Risk exists if you are implementing it incorrectly and your benchmarking analysis is flawed and not showing you the key factors causing the performance difference between you and your competitor.
